The European Central Bank (ECB) must change the structure of the European mortgage market and create a ‘Fannie Mae’ for Europe if it is to stimulate consistent economic growth, according to Legal & General (L&G).

Fannie Mae is one of the US Government backed funding operations that purchases mortgages from lenders by issuing long-term bonds to investors, causing mortgages to be funded by long-term borrowing and be responsive to long-term interest rates. Andrew Clare, financial economist at L&G, has called for a system of long-term fixed rate mortgage funding, as is being considered in the Miles Review, to be implemented across the EU.

Clare said: “If, in this downturn, Europe had had in place a mortgage funding arrangement that allowed mortgage holders to re-fix their mortgages at no cost as interest rates fell – a ‘Fannie Mae’ for Europe – the European economy would have responded to the European Central Bank’s (ECB) rate cuts and would probably have performed far better as a result.”

However, Clare warned the creation of longer-term mortgage lending in the UK would not solve the Chancellor’s concerns over the UK’s sensitivity to short-term interest rates, and the key to EU integration would be changes organised by member states and the ECB.

He said: “We believe the ECB should be taking the lead in identifying ways of making its interest rate changes more effective and more even across European regions. At the moment, when it comes to influencing European demand, the ECB is pushing on a piece of string.”

Clare said the ECB is currently debating how its decisions could be better transmitted to member countries and said the switch to long-term funding of mortgages is the obvious answer. “Lenders will just access funding at a supranational level so there would not be any change to local markets, it will just result in another type of product.”

However, Lawrence Sanders, economist at Bristol & West, said: “The US experience of long-term mortgages has been uncomfortable. There have been serious problems of risk management and the savings and loan industry had to be bailed out by the US Government with sums running into billions of dollars. The federal agencies were around in this period and so the correlation between long-term mortgages and economic efficiency is not there.”